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Markets Not Good Guide to Value of Dollar

December 20, 1987|JAMES FLANIGAN

Is the dollar really worth only 125 yen, where once it was worth 360? Are the currency markets delivering a value judgment on U.S. society? The answer is no, the markets are overshooting reality on currency--and they may be doing the same with oil prices. But we should understand why.

The oil price swooned and the dollar hit 40-year lows last week despite a renewed pledge to maintain prices by the Organization of Petroleum Exporting Countries and claims by the Reagan Administration that it doesn't want the dollar to fall further.

But both cartel and White House are shouting into the wind. The markets--traders of oil or currency worldwide--are pushing prices down because they find the OPEC agreement unconvincing and don't believe that the Administration can or will do anything about the currency or the economy. But markets seldom set values accurately--despite what people say. They go too far, overshooting in one direction and then bouncing back to overshoot in the other.

And so last week's prices were lower than they're likely to be over the next few years.

In the case of oil, tumbling prices may reflect many things, from excess inventories to rivalries within OPEC. But a steep decline like that of 1986--when a popular grade of OPEC oil hit $6.50 a barrel--is unlikely, says Managing Director Barry Good of Morgan Stanley. As if signaling that the current disorder is temporary, OPEC has scheduled another meeting in February.

Where might the price settle? Something less than the $18-a-barrel price that suited both oil producers and customers over the last year--closer to $15 or $16 a barrel, say analysts.

There's less uncertainty on the dollar. It is already too low. An exchange rate of 125 yen or 1.6 German marks doesn't recognize that U.S. productivity is now so strong that, as the Economist magazine reports, each American worker produces more per dollar of labor costs than his counterpart in Japan or Germany.

So currency traders expect the dollar to hit bottom next year and then turn upward. Pierre Rinfret of Rinfret Associates, a currency firm, expects the low point in March at 110 yen and 1.4 marks.

Counterproductive Decline

What does "upward" mean? That the dollar will rise, but slowly. It took three years, 1982 to 1985, for the dollar to reach its high point, notes chief economist Albert M. Wojnilower of First Boston Corp. And it has taken more than two to come down. So the next couple of years will see a relatively weak but rising dollar--130 to 150 yen, perhaps, or 1.6 to 2 marks.

The decline has become counterproductive. A falling currency cuts prices to make U.S. exports attractive. But with U.S. industry selling all it can make and piling up back orders these days, it makes no sense to go on cutting prices.

And not everybody benefits. Financial firms opening offices in Tokyo are hurt. So are companies in businesses where size matters--as in international banking. The weak dollar diminishes the assets of U.S. banks, exaggerates those of Japanese banks.

In a word, the declining dollar makes U.S. companies undervalued. And that means foreign firms will step up U.S. acquisitions. The foreigners invest for long-term reasons, of course, not to make a buck on currency.

But currency plays a role, as Siemens' losing bid illustrates. In 1985, Siemens, the West German electrical giant, wanted to acquire Allen-Bradley Co., the Milwaukee manufacturer of automation equipment. Siemens bid $1.5 billion but would not go higher, and Rockwell International won Allen-Bradley for $1.68 billion.

Why couldn't Siemens go higher? The reason was psychological. The strong dollar was worth more than 3 marks at the time. So the Munich firm would have been laying out more than 5 billion marks for a bid equal to Rockwell's. "Our board looked at that 5 billion mark barrier," said Siemens Chairman Karlheinz Kaske, "and nobody wanted to go over it."

At today's exchange rate, Siemens could top Rockwell's bid for less than 3 billion marks. So you can bet Siemens and others will be picking up U.S. companies at bargain prices.

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